3 Reasons Why the Box IPO Will Flop

The company's Q1 numbers were good, but challenges are overwhelming

Box, the cloud-based storage operator, was planning on launching its IPO in the spring. The company recently raised $150 million from TPG and Coatue Management. But now it looks like a deal will not happen until the fall. And even this new timeline may be a long-shot for a Box IPO.

This week the company also released its first amended S-1, which included the results for the first quarter. And there were some notable positives in the filing. For Q1, revenues shot up by 94% to $45.3 million and the number of paying customers hit almost 40,000, up from 34,000 at the beginning of the year.

Box IPO Problem #1 — Burn Rate

The Box IPO looks like a throwback to the crazy 1990s. That is, the losses are downright frightening. Since Box’s founding in 2005, the company has hemorrhaged a whopping $399.7 million in net losses.

While many other cloud operators lose money, they come nowhere near to the levels of Box. Consider the following:

It does look like Box is making attempts to reduce the burn rate, though. In Q1, the increase in the losses slowed to $38.5 million, or 13%.

However, these efforts may ultimately have an adverse impact on the Box IPO. With lower spending on marketing and R&D, it will be tougher to maintain the heady growth rate. Keep in mind that this happened to other high-loss companies, such as Groupon (GRPN).

Box IPO Problem #2 — The Brutal Competition

Box competes against many top-notch private companies like Dropbox, Egnyte, Hightail and Syncplicity. But there is also intense pressures from bigger companies like Google (GOOG) and Microsoft (MSFT). Actually, both companies have recently engaged in a price war.

In the case of Microsoft, the company is offering 1 terabyte of free storage for subscribers of Office 365 (which costs $70 per year). Or if someone wants just storage, it will cost a mere $2 per month for 100 GB.

As for Google, it is now offering its business cloud apps at $10 per month — with unlimited storage. The system also is enterprise-ready, with extensive security features.

Box, on the other hand, still charges $10 per month for a mere 10G of storage.

Box IPO Problem #3 — Negative Perceptions

Wall Street probably thinks that the Box IPO is damaged goods.

The recent $150 million in funding is an indication of this. It’s quite rare for a company to do such a financing when it has filed for an IPO. But then again, Box really needs the cash. During Q1,the company’s cash position fell from $108.85 million to $79.26 million!

Wait — wasn’t the funding bumped up to a higher valuation? Yep. Box was able to negotiate a market value of $2.4 billion, up from $2 billion in December 2013. But valuations can be misleading. After all, TPG is a savvy investor and may have included protections, such as antidilution clauses and ratchets. These essentially provide more shares if there is an erosion in the valuation.

Granted, the first half of 2014 has been tough for cloud IPOs. But the offering of Zendesk showed that there remains interest in the space. Since going public in mid-May, the shares are up an impressive 75%.

Then again, the company has much less competition and its losses are reasonable — which, of course, is directly opposite of the Box IPO.

Bottom line: Don’t get excited for the Box IPO. The losses and competition are just too tough to swallow.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.